In your first audit of Hydrafoil Company, a manufacturer of specially designed boats capable of transporting passengers over water at very high speeds, you find that sales are made to commercial transportation companies. The sales price per unit is \(\$ 400,000\), and with each unit sold, the client gives the purchasing company a certificate reading as follows:

The president of Hydrafoil Company explains to you that the purpose of issuing the certificates is to ensure contact with customers when they are in the market for new equipment. You also learn that the company makes no journal entry to record a certificate when it is issued. Instead, the company charges an expense account and credits a liability account \(\$ 200\) per month for each outstanding certificate, based on the company's experience that its hydrafoil boats will be rendered obsolete by new, more efficient models in approximately 10 years from the date of sale.
Required: 

Do you concur with Hydrafoil Company's accounting for the certificates? You may assume that the 10-year service life of the product (and therefore of the certificates) is an accurate determination. Explain your position clearly.

Transcribed Image Text:

Hydrafoil Company promises to pay ignated as Serial No. such retirement is submitted. the sum of $24,000 when the boat des- is permanently retired from service and evidence of